Thank you for Subscribing to CIO Applications Europe Weekly Brief

Blockchain and its Potential for the Real Estate Industry

Blockchain — the technology behind the crypto currency Bitcoin is, along with artificial intelligence, 3D printing and virtual reality, is certainly one of the most cited developments when it comes to digitization — or in short to future trends and technologies.

Especially due to the association with Bitcoin, the common understanding is that a dramatic change for the financial sector is imminent. But why should this technology have an impact on the real estate industry? Especially when a continuing good economic situation favours this sector — and the fact that digitization has been so far slow within the real estate industry has not damaged the good results. To answer this question, it makes sense first to recap the basic qualities of the technology.

The blockchain technology

Blockchains are special databases – distributed ledger to be more precise — that can manage transaction data without a central control, without the need for mutual trust between parties and with complete transparency. It is about creating transparency, speed and optimal efficiency. A blockchain can be publicly designed as public blockchain, like Bitcoin, or for a defined group of users as private blockchain or consortium blockchain.

In simplified terms, this results in three particularly interesting abilities of blockchain technology:

1. distributed
2. immutable
3. no middleman necessary

Distributed is therefore of interest because a distributed data architecture avoids the 'single point of failure' and makes the system extremely resistant. This is nicely illustrated in the graphic comparison of central, decentralized and distributed networks by Paul Baran (1962).

Unchangeable is a feature that has never existed in the digital world before — no matter how secure a database is, there is still a 'super admin' who can change or even delete an entry. This is not the case with blockchain. Everything that has been stored there is stored there forever. Thus, information can be completely traced back by means of a blockchain and its correctness can be guaranteed.

From a technical point of view, data is stored linearly in individual 'blocks'. Between the blocks a connection (chain = chain) is created by a cryptographic checksum, which cannot be changed any more, thus the data of the blocks are safely stored in the chain. However, a restriction must still be mentioned. If more than 50% percent of the nodes of the entire distributed network are taken over at the same time, theoretically changes can be made to a block chain. Whoever controls the majority of the network can so to say define the truth. However, the effort for this process is so enormous that it is today considered as impossible.

Due to the complexity and the resulting lack of transparency, many real estate transactions cannot be realised without helpful middlemen

And these two characteristics - distributed and unchangeable - make it possible that no middleman is needed for transactions with a blockchain. The system verifies the transaction, confirms that the values to be transferred exist and are not booked twice and stores them in a block, which concludes the transaction. No institution has to act as trusted partner between suspicious traders.

Potentials for the real estate industry

The opportunity and challenge lie in how these possibilities can be used in a complex industry such as real estate. Due to the complexity and the resulting lack of transparency, many real estate transactions cannot be realised without helpful middlemen. But there are also many artificially created breaks that make it unnecessarily difficult to implement real estate projects efficiently.

For example, the due diligence prior a real estate transaction. The new owner will not trust the information that is provided by the old owner thus both parties do their own checks. And this is where Blockchain technology can help. The history of a building can be recorded immutable on a blockchain and has the potential to significantly reduce transaction. By creating transparency and sharing data without losing control or rights to that data, complexity is reduced. The focus can be set on value creation instead of process management.

Another area of potential improvement is the rental agreement. Although the conditions for rental agreements are—in most jurisdictions — pretty much predefined by the law, the process of agreeing on the conditions of a contract often takes a lot of time and legal support. A blockchain powered rental contract generator could help here to speed up the process, increase the trust in it and reduce the involvement of legal counsel.

The most eagerly anticipated use case is probably the tokenization of assets – the breaking down of one piece of real estate in many digital shares (tokens) that can be traded freely. The goal is to make real estate accessible for everyone in the world, with literally no financial entry barrier. The big obstacle for this vision — that might also be a nightmare for some of us — are regulation, or the lack of it. Therefore, solutions that offer asset tokenization today are rather financial product as the financial market is well regulated. This will stay this way until the question ‘who owns the tokenized property’ has been answered.

Outlook

For today, blockchain offers evolutionary improvement for existing processes not yet the big disruption. Many tasks that are done manually will be taken over by algorithms. Blockchain— based applications are still clearly in their infancy in the real estate industry. There are only a few applications that have been implemented in the form of working products - but the number of start-ups using blockchain is rising rapidly. What is certain is that the technology offers the potential for change in almost all areas of the real estate industry and their value creation processes.